Rising Home Values Lift Home Depot to Big Quarter

Home Depot (NYSE:HD) saw demand for do-it-yourself products and big-ticket items outstrip expectations in the first quarter, as rising home values encourage homeowners to open their wallets.

The world’s largest home-improvement retailer said the housing market has provided a tailwind for Home Depot stores. The most recent S&P/Case-Shiller Home Price Index showed that U.S. home prices moved 5.3% higher in the 12 months ended in February. On Tuesday, the U.S. Commerce Department said housing starts were up 6.6%, good for a seasonally adjusted rate of 1.17 million units in 2016.

In the first three months of the year, sales at existing Home Depot stores were up 6.5%. Spending at U.S. stores was even better with domestic comparable sales rising 7.4%. Home Depot also said the average ticket grew 2.5%. Given the strong start to 2016, Home Depot lifted its financial guidance for the whole year.

Home Depot Chief Financial Officer Carol Tomé said higher home values are driving consumers to invest in upgrades. The company believes home prices will climb about 5% this year, followed by a possible 3% increase in 2017.

“The housing data suggests that homeowners feel like they have more value than they did before. Homes with negative equity have dropped from 22% at the beginning of 2012 to now 8.5%,” Tomé told analysts during a conference call.

Beyond DIY demand, Home Depot detailed ongoing sales momentum in its Pro business, which primarily consists of contractors. Pro-heavy categories including fencing, doors and decking posted double-digit growth in comparable sales last quarter.

CEO Craig Menear emphasized that demand has picked up across the store. With consumers spending more, Home Depot recorded 9.5% more tickets over $900.

“While our Pro business was strong, we’re also very pleased to see the growth in our DIY business. The balance is what we’re striving to achieve,” Menear said.

Ticker Security Last Change Change %
HD THE HOME DEPOT INC. 363.49 -2.72 -0.74%
LOW LOWE'S COMPANIES INC. 238.44 -0.82 -0.34%

The Atlanta-based retailer said Tuesday its quarterly revenue surged 9% to $22.8 billion versus the same period a year ago. Earnings rose 14% to $1.8 billion. On a per-share basis, Home Depot earned $1.44 a share. Wall Street analysts had forecasted per-share earnings of $1.36 and revenue of $22.39 billion.

Home Depot now expects to book full-year earnings of $6.27 a share on revenue growth of 6.3%. The company previously said earnings would likely come in between $6.12 and $6.18 a share, with revenue rising 5.1% to 6%. Home Depot’s outlook for comparable sales calls for a 4.9% improvement, better than its prior guidance for 3.7% to 4.5%.

Home Depot executives are looking for another strong run in the second quarter, citing a late start to spring in many areas of the country. Lowe’s (NYSE:LOW) is scheduled to report first-quarter earnings Wednesday.

Home-improvement stores have been a bright spot in a sluggish retail industry. The Commerce Department said home-improvement spending in March edged 1.4% higher versus February. Meanwhile, total U.S. sales at retail stores and restaurants declined 0.3%. The Home Improvement Research Institute and research firm IHS have projected 4.7% industrywide sales growth in 2016 compared to last year.